After suffering for months, Freddie Mac and Fannie Mae have handed the reins over to the U.S. government in a historic takeover of the two mortgage companies, CNN reported, and as a result, U.S. stocks have soared more in early-morning trading than they have in the last month.

Announced Sunday by Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency, the takeover will place the two companies into a conservatorship that will be overseen by the Federal Housing Finance Agency. The arrangement will give the government temporary control of the two companies until they are on stronger footing financially.

The New York Stock Exchange suspended pre-market trading of the two companies’ stock, in order to allow investors to digest the government’s actions. However, the suspension didn’t stop the stock market from reflecting the takeover.

In the wake of the announcement U.S. stocks surged, with the Dow Jones industrial average up more than 300 points. Conversely, shares of Freddie Mac were down more than 75 percent to $1.25, and Fannie Mae down more than 80 percent to $1.32.

“Clearly, it’s having a calming effect on the markets,” said John Sorensen, president and CEO of the Iowa Bankers Association. “It should actually reduce mortgage interest rates by providing additional liquidity to the markets. In the case of bondholders in Fannie and Freddie, those investments will be protected.”

Rick Carter, the Dean’s professor of finance at Iowa State University, said he was pleased to hear of the takeover, particularly as he owns bonds issued by both Fannie and Freddie.

“When I got into it as an investor, I did it with the thought that if something went bad, that there would be a bailout,” he said, noting he doesn’t own either company’s stock. “I don’t know how much this guarantee is going to do for their stock.”



Carter, who teaches courses in real estate finance, said he believes the move should result in lower interest rates for home borrowers.

“One of the problems is they kind of turned their back on their strict standards; they had kind of slipped the past few years to take advantage of the (riskier) mortgages out there. Assuming they have time to do it, they’ll be taking on less risky loans, and the rates will reflect that.”

The New York Stock Exchange wouldn’t comment to CNN on whether the two mortgage companies were at risk of being delisted from the exchange. However, the structure of the takeover allows Freddie and Fannie stock to recover in value once the companies regain financial standing and are no longer under government control.

“I think the trend in home values would be the uncertainty that still remains,” Sorensen said. “The reduction in mortgage rates could help to stem that tide. It’s a trend being felt more on the coasts than here in Iowa; our housing values here have remained fairly stable. And our foreclosures and foreclosure starts have been much more positive than elsewhere. … I think it will be business as usual in Iowa. And if this stabilizes the housing market, it could have a very positive effect in our state.”

Sorensen said most Iowa banks’ investments in Fannie and Freddie are in their bonds, not stocks, and that he has not heard of any Iowa banks that have significant exposure to Fannie and Freddie stock. The Office of Thrift Supervision said it has identified 17 banks nationwide whose stock ownership makes up more than 10 percent of their Tier 1 capital reserves.

As part of the takeover, the government will receive $1 billion in each company’s preferred stock, as well as a quarterly dividend payment and the right to own 79.9 percent of each company.

The transition also means both company’s CEOs will no longer lead the mortgage giants. Instead, the government has sought out Herb Allison, former chairman and CEO of pension provider TIAA-CREF, to head Fannie Mae, and David Moffett, former vice chairman and chief financial officer of U.S. Bancorp, to take over Freddie Mac.